Director's Loan Account UK 2026/27: Tax Rules, Traps and How to Repay

What Is a Director's Loan Account?

A director's loan account (DLA) is a record in your company's books that tracks money flowing between you and your company outside of salary, dividends or expense reimbursements. When you take money from the company that is not salary or dividends, it is recorded as a loan to you -- and the account goes overdrawn. When you put money into the company, the account goes into credit.

Directors of owner-managed businesses frequently use their DLA for:

• Taking cash advances before dividends are declared
• Temporarily funding personal expenses through the business
• Repaying money they previously lent to the company

While a DLA is a legitimate and common tool, an overdrawn DLA triggers serious tax consequences if not managed carefully.

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When Is a Director's Loan Account "Overdrawn"?

The DLA is overdrawn whenever you owe money to your company -- i.e. the company has paid out more to you (outside salary and declared dividends) than you have put back in.

Common ways a DLA goes overdrawn:

• Drawing cash from the company without declaring a dividend or salary
• Company paying your personal bills, credit cards or mortgage
• Forgetting to account for personal use of company assets

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The S455 Tax Charge: The Key Deadline

If your DLA is overdrawn at the end of your company's accounting period and remains unpaid 9 months and 1 day after that period ends, the company must pay Section 455 Corporation Tax (S455) on the outstanding balance.

S455 Rate in 2026/27

The S455 rate is 33.75% of the outstanding loan amount. This mirrors the higher dividend tax rate and is designed to prevent directors from using loans as a tax-free substitute for dividends.

Example

• Company accounting year ends 31 March 2026
• S455 deadline: 1 January 2027 (9 months + 1 day later)
• DLA overdrawn by £30,000 at 31 March 2026
• S455 charge: £30,000 x 33.75% = £10,125 payable by the company

This comes on top of any other corporation tax the company owes -- it is a separate charge.

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How to Avoid the S455 Charge

The simplest way to avoid the S455 charge is to repay the loan before the 9-month deadline. You can repay by:

• Salary or bonus -- voting yourself a salary/bonus that is allocated against the DLA
• Dividend -- declaring a dividend and offsetting it against the overdrawn balance
• Personal cash repayment -- transferring money back to the company from your personal bank account
• Expense reimbursements -- if the company owes you genuine expenses, offsetting those

The Bed and Breakfasting Anti-Avoidance Rule

HMRC is aware that some directors repay the loan just before the deadline and immediately redraw it after. There are specific anti-avoidance rules (the "bed and breakfasting" rules) targeting this:

• If you repay £5,000 or more and redraw within 30 days, HMRC ignores the repayment and treats the loan as still outstanding.
• If the repayment and redraw form part of an arrangement made before the repayment, HMRC can also challenge it regardless of the 30-day window.

These rules apply if the re-drawn amount is £5,000 or more. For amounts under £5,000, the rules are less strict, but HMRC still has general anti-avoidance powers.

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Reclaiming S455 Tax After Repayment

The good news is that S455 is a temporary tax -- it is refundable once the loan is fully repaid. However, the repayment process is not instant:

1. You repay the loan (or it is written off/released)
2. You can claim the S455 repayment from HMRC, but only after 9 months and 1 day from the end of the accounting period in which repayment was made
3. You claim via form L2P or by including it in your corporation tax return

This timing lag means you can be out of pocket for well over a year before you get the S455 back.

Repayment Timing Example

• Company year end: 31 March 2026
• S455 paid: 1 January 2027 (£10,125)
• Loan repaid by director: 15 June 2026
• Earliest S455 reclaim: 1 January 2027 (9 months after 31 March 2026 -- same as payment date here)
• But if the loan is repaid in the following accounting year (after 1 April 2026), the reclaim date pushes to 9 months after 31 March 2027 = 1 January 2028

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Beneficial Loan Interest: The Other Tax Trap

Even if your DLA is overdrawn by less than the S455 threshold, HMRC may charge you personal income tax on the "beneficial loan" if the company is not charging you interest.

HMRC sets an official rate of interest. If the outstanding DLA balance averages more than £10,000 during the tax year and the company charges you less than the official rate, the difference is a benefit in kind (BIK) on which you pay personal income tax.

For 2025/26, the official rate was 2.25% -- check HMRC's website for the current 2026/27 rate.

How to Avoid the Beneficial Loan Charge

Charge yourself interest at least equal to HMRC's official rate. The company receives this as income and it is subject to corporation tax, but it eliminates the BIK charge for you personally.

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Writing Off the Director's Loan

Sometimes directors decide to write off the overdrawn balance rather than repay it. This has the following consequences:

• For you personally: The written-off amount is treated as employment income (not a dividend) if you are a participator and officer/employee. You pay income tax and NI on it through PAYE.
• For the company: The write-off is not an allowable deduction for corporation tax purposes. The company also still pays S455 on the amount (which is refundable only once the income tax is paid).
• Class 1 NI: Employment income arising from a loan write-off attracts Class 1 NI for both you and the company.

Writing off the loan is rarely the most tax-efficient route compared to declaring a dividend (if there are sufficient retained profits) or making a cash repayment.

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DLA in Credit: When You Lend to the Company

If the DLA is in credit -- meaning you have put more money into the company than you have taken out -- the company owes you money. You can:

• Repay yourself tax-free (this is return of a loan, not income)
• Charge the company interest on the loan (taxable as income for you, deductible for the company subject to thin capitalisation rules)

There is no S455 issue with a DLA in credit. In fact, a credit DLA is one of the most tax-efficient ways for a director to inject funds into a business.

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Record-Keeping Requirements

HMRC expects companies to maintain a detailed DLA ledger. Best practice:

• Record every transaction with a date and description
• Reconcile the DLA at least quarterly
• Ensure the year-end balance is clearly reflected in the accounts
• Keep board minutes for any dividends declared to offset the DLA

Poor record-keeping is one of the most common triggers for an HMRC enquiry into owner-managed businesses.

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Key Figures and Deadlines for 2026/27

Managing your director's loan account carefully can save the company significant amounts in S455 charges and avoid unexpected personal tax bills. The fundamental rule is simple: keep the DLA balance low, repay before the 9-month deadline, and never assume a short-term loan will go unnoticed by HMRC.